Figured out why it wasn't working. The answer was in the proxy_pass directive.
During the working:
* two or by more slashes are converted into one slash: "//" -- "/";
* references to the current directory are removed: "/./" -- "/";
* references to the previous catalog are removed: "/dir /../" -- "/".
the matching for rewrites is performed against the CLEANED request. ie, it is performed against $uri NOT $request_uri.
So my redirect never happened because it never matched. I should be thankful there is some documentation but it really needs to be better. Now that I intuitively understand how rewrite and proxy_pass works, I am able to understand the sometimes cryptic translations. Again, I will be grateful that I can leverage open source and didn't have to write my own proxy/web server from scratch.